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Senate Passes IRS Overhaul

By Albert B. Crenshaw
Washington Post Staff Writer
Friday, May 8, 1998; Page A01

The Senate voted unanimously yesterday to approve the most far-reaching overhaul of the Internal Revenue Service in more than 45 years, responding to a political outcry over alleged abuses by IRS agents and managers.

The measure, passed by a vote of 97 to 0, would set up an oversight board made up mostly of nongovernment members to review IRS operations and set policy, and establish greater Treasury Department control over the internal unit that investigates complaints against the agency.

It also would grant taxpayers extensive new rights in dealing with the IRS. Under the bill, if a taxpayer became embroiled in a court battle with the government over a tax liability, the burden of proof would fall on the IRS rather than the taxpayer, so long as the taxpayer kept records and cooperated with the IRS.

The measure would provide new protections for people stuck with tax bills incurred by a former spouse, limit penalties and interest now imposed in a variety of situations and restrict the agency's collection methods.

The Senate bill would cost the Treasury an estimated $18.3 billion over 10 years, most of that from revenue losses resulting from the new taxpayer rights. The senators agreed to pay for those costs by restricting several corporate write-offs and by making it easier for well-heeled senior citizens to convert traditional individual retirement accounts to new Roth IRAs. Critics contended that the IRA provision would boost revenue only in the short run while losing it in future years.

"The IRS is going to change and change dramatically as result of this" legislation, said Sen. Bob Kerrey (D-Neb.), who co-chaired a congressional commission that spent a year studying the agency, and who along with Senate Finance Committee Chairman William V. Roth Jr. (R-Del.) was a key architect of the measure.

Beyond the rules and structural changes, Roth said the bill would change the culture of the IRS from one focused on law enforcement to one focused on customer service.

Today, "the agency has too much power and not enough sunshine," Roth said. "There needs to be a cultural shift within the agency. This legislation will provide a catalyst for that change."

President Clinton said in a statement yesterday that he is "very pleased" with the Senate action and said "final passage of this reform bill will help out efforts to give Americans the modern, customer-friendly IRS they deserve."

The bill now heads for conference with the House, which passed a less wide-ranging measure last fall. That bill would cost an estimated $2.6 billion over five years.

The bill emerged after two widely publicized sets of hearings before the Senate Finance Committee at which an array of taxpayers and IRS workers recounted stories of abuses allegedly perpetrated by the agency. The hearings brought an outpouring of public support for drastic change in the procedures governing IRS operations.

But the furor generated by the hearings was not the only factor driving the legislation. More than a year ago, it became clear that the IRS had been unable to modernize its computer systems, some of which date back to the 1960s, despite the expenditure of more than $4 billion. Moreover, some conservatives on Capitol Hill have been seeking to throw out the current tax system entirely and replace it with some form of consumption tax, such as a national sales tax or value-added tax, or with a one-rate "flat" income tax.

These factors led both the Clinton administration and members of Congress on both sides of the aisle to focus on the agency, though with somewhat different goals. The administration at first sought to confine the debate to modernization of the IRS information systems and its management structure. But after the Finance Committee hearings, the White House hastened to endorse wider reform.

The result is a bill that enjoys wide support, but that some Treasury officials and former IRS commissioners fear would make tax collection more difficult. Some critics fret that the bill might even force the agency to become more intrusive, by making it more dependent on records from third parties -- such as banks and brokerages -- and by imposing deadlines that could lead IRS officials to move hastily or risk losing the right to collect.

The bill would change the agency and its relationship with taxpayers in three key ways:

The agency's structure would be revamped for the first time since 1952.

A nine-member oversight board would be established to set strategy for the agency. It would comprise the Treasury secretary, a representative of the IRS employees union, the IRS commissioner and six private citizens with expertise in areas such as management, small business and information systems.

The present structure, in which the agency is divided into geographic fiefdoms, would be abandoned. The agency would be reorganized around specific types of taxpayers -- individuals, large business, small business and so on.

The commissioner would be given more personnel flexibility.

In an effort to entice qualified outsiders into the agency, and to make the best use of the current work force, the commissioner would be allowed to give some workers higher pay and to move senior executives around within the agency.

Taxpayer rights would be greatly widened.

The measure would allow "innocent spouses" to opt to be taxed only on the portion of the family income attributable to them, a provision that might aid as many as 50,000 taxpayers, mostly women, who find themselves liable for tax bills incurred by their husbands or ex-husbands.

The government would bear the burden of proving a taxpayer incorrect in a dispute that reached the courts. But to prevent taxpayers from simply defying the IRS to prove its case, the bill would require proper record-keeping by the taxpayer.

It would also expand taxpayers' rights to recover civil damages in the event of improper collection activities by the IRS or negligent actions by IRS employees. The Finance Committee heard numerous horror stories of threats used to compel payment or of property seized for taxes that were not owed.

And the measure would eliminate penalties and interest for delinquent taxpayers under certain circumstances.

One issue not entirely resolved yesterday is the method of paying for the bill.

Minority Leader Thomas A. Daschle (D-S.D.) called the IRA change "crazy, half-baked . . . about as Orwellian as you can get," and said that while it would raise money at first, it would end up costing the government $46 billion over 20 years.

© Copyright 1998 The Washington Post Company

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